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Should You Buy Twitter Stock Ahead of Earnings on Tuesday?

Twitter (NYSE:TWTR) is expected to release earnings tomorrow, April 23, before the open. Year-to-date, Twitter stock is up almost 20%. I believe that the relatively strong recent performance of TWTR stock has been based on robust fundamentals. Last quarter’s results showed that Twitter is making more money than ever before as it delivered its fifth profitable quarter in a row. I expect the positive trend in earnings to continue this quarter, too.

With earnings season in full swing, let us look at the catalysts that are likely to provide tailwinds to TWTR stock price during the rest of the year.

Twitter Stock’s Fundamentals Are Robust

Recent research shows that most U.S.-residents get their news from social media as opposed to more traditional outlets, such as TV or print media. With more than 336 million monthly active users (MAUs), Twitter is one of the biggest social networks globally. Its main competitors include Facebook (NASDAQ:FB), Snap (NYSE:SNAP) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).

The number of users and the engagement of users are crucial in determining the value of a social network company and hence its stock price. When Twitter reports, investors will pay attention to Twitter’s user metrics, particularly its monetizable daily active users (mDAU). The company revealed this metric for the first time ever during its Q4 2018 earnings report. Twitter has 126 million users daily and this figure is growing.

Twitter said that it only counts users who could be exposed to ads — its “monetizable” audience. Many investors have since cheered this number as they feel that there is further room for Twitter to grow, translating to a potential increase in the stock price.

The microblogging service also reported $791 million in ad revenue in Q4, an increase of 23% year-over-year (YOY) as well as a jump in profits by 180% YOY. Finally, Twitter’s data licensing revenue increased 35% YOY to $117 million.

Data Licensing is Propelling TWTR’s Growth

As the world’s best-known micro-blogging platform Twitter is used by politicians, journalists and global brands. Many readers see breaking global news or the opinions of famous people on TWTR first. In its February earnings release, investors applauded Twitter’s data licensing business, a significant revenue generator which produced double-digit percentage growth.

The data licensing business involves providing additional information to companies about tweets. Recently, the company has started offering cheaper data access packages to smaller companies, a move that is likely to increase its revenue further.

Wall Street now expects Twitter’s high-margin data licensing revenue to be boosted by further international expansion, as the number of overseas TWTR users are increasing, especially in the developing world. Its latest earnings call noted that the total international revenue was $403 million, an increase of 24%, or 27% on a constant currency basis.

Furthermore, TWTR will be able to monetize the videos on its website more effectively as it captures a higher percentage of ad spending that is moving to digital video. Twitter owns Periscope, a live video streaming app. In general, video has far higher engagement than text or banner advertisements. To incentivize video makers, Twitter gives the creators get 70% of the ad revenue.

Handling of Digital Security Issues

Especially during 2018, Facebook has been hurt by declining user growth following the digital security issues that were revealed by the Cambridge Analytica scandal. Facebook’s user losses accelerated and investors seem skeptical about its ability to resolve the complex problems it’s facing.

On the other hand, TWTR stock has weathered the initial headwinds of its digital security issues better than FB, as the company has taken steps to remove fake accounts and improve user engagement. Analysts and investors have credited CEO and founder Jack Dorsey with making Twitter more relevant, even as many other social media stocks are going through a rough stretch.

Short-Term Technical Charts

Over the past few weeks, TWTR stock has been trading in a range of $30-$35. Priorly it has formed a base between $27.50-$32.50. This level now acts as a support zone, from which the shares can easily make a new sustained leg upwards.

Tech stocks may be volatile during Q2 as there could be some short-term profit-taking following the strong Q1 gains. During this earnings season, if the internet services industry which TWTR is part of, other social media companies, or the broader market decline as the companies release earnings, Twitter stock price may also be adversely affected.

When the company reports earnings on April 23, investors will pay extremely close attention to the details in the company’s quarterly results. The options markets are pricing in an approximate post-earnings move of 10-12% in either direction in TWTR shares. In case of a favorable earnings report, my next price target for Twitter stock in the coming weeks is between $38 – $42.

On the other hand, any disappointment in Twitter’s earnings statement or future outlook could quickly send the shares to low $30’s. Thus, there might be a weakness in the TWTR stock price in the near-term that potential investors should anticipate.

The Bottom Line on TWTR Stock

Although I would not advocate bottom-picking as there might be more volatility and even a small initial sell-off following the Twitter earnings report, the social media company’s best days from a robust fundamental perspective are likely to be ahead of it.

On a final note, takeover rumors of Twitter have been around for several years. The two potential names to buy the company could be Alphabet or Disney (NYSE:DIS).

Investors who are interested in social media companies, but do not want to commit all their capital to a single stock such as TWTR may also consider investing in various exchange-traded Funds (ETFs) that have Twitter as a holding, including Communication Services Select Sector SPDR (NYSEARCA:XLC) or Global X Social Media Index ETF (NASDAQ:SOCL).

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.